As pension crisis looms, Pottsgrove thankful for foresight

LOWER POTTSGROVE — Pottsgrove schools business manager David Nester didn’t have to be a rocket scientist to see that the way the state was dealing with educator pensions was going to come back and bite everyone on the posterior.

Nester convinced the school board to start setting money aside to pay for the giant pension bills that everyone could see coming.

So, when the state educators retirement system, known as PSERS, began lowering contribution rates because of robust investment returns on Wall Street, Pottsgrove decided to hedge its bets.

“When the rate went from 7.13 percent (of payroll) to 5.69 percent, we didn’t drop the amount we set aside for pensions,” Nester explained recently as he prepared for a presentation of the $60.9 million preliminary budget to the school board.

“We had surpluses over the years and we saw this coming far in advance,” Nester said.

That bet paid off and the district now has $4.9 million set aside in an account to help soften the impact of skyrocketing pension costs.

In the coming school year, school districts face an increase in payments from 12.36 percent of payroll to 16.93 percent — that’s a 37 percent hike in just one year.

And rather than spend its savings all at once, Nester has laid out a “phasing plan” through 2016 that draws off a couple hundred thousand dollars a year to offset the jump in pension costs until the increases level out at 27 percent of the district’s payroll.

But the increases are jarring.Just last year, the district’s pension costs jumped by $675,000.

Nester said that the new pension payments would represent a full 5 percent of the district’s budget.

That might not sound like a lot until you consider that payroll alone consumes 66 percent of all district revenues. with another 10 percent of revenues locked in for debt payments. That leaves the school board less than 25 percent of the total budget to make adjustments.

Take another five percent of flexibility out of that and it leaves the board with less than 20 percent of the budget in which to fund programs.

Given that many education programs are mandated, it doesn’t take long until the board has to look at cutting non-mandated programs like art, music, athletics and extra-curricular activities to balance the budget.

Even more pension pressure is added from demographics, said Nester.

“Remember you have all the baby boomers retiring at the same time,” meaning the system will be making larger payments, leaving less to invest and generate revenue to offset contributions.

Reforms like changing the system from “defined benefit” to “defined contribution” or reducing the “multiplier” formula that increases pension payments “will not make a tremendous amount of difference in the immediate future,” Nester said, describing such changes as “chipping away at the edges.”

About the only thing that would resolve the immediate shortfall problem would be another, sustained bull market on Wall Street, said Nester.